Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Ark Restaurants Corp. (NASDAQ:ARKR) does have debt on its balance sheet. But is this debt a concern to shareholders?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Ark Restaurants
The image below, which you can click on for greater detail, shows that Ark Restaurants had debt of US$24.9m at the end of July 2022, a reduction from US$36.8m over a year. However, it does have US$26.6m in cash offsetting this, leading to net cash of US$1.71m.
According to the last reported balance sheet, Ark Restaurants had liabilities of US$33.5m due within 12 months, and liabilities of US$89.8m due beyond 12 months. On the other hand, it had cash of US$26.6m and US$5.02m worth of receivables due within a year. So its liabilities total US$91.7m more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's US$63.6m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Ark Restaurants boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.
It was also good to see that despite losing money on the EBIT line last year, Ark Restaurants turned things around in the last 12 months, delivering and EBIT of US$14m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ark Restaurants's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Ark Restaurants has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Ark Restaurants actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Although Ark Restaurants's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$1.71m. And it impressed us with free cash flow of US$16m, being 112% of its EBIT. So we don't have any problem with Ark Restaurants's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. Be aware that Ark Restaurants is showing 3 warning signs in our investment analysis , you should know about…
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Find out whether Ark Restaurants is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
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Ark Restaurants Corp., through its subsidiaries, owns and operates restaurants and bars in the United States.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Solid track record and good value.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.
Ark Restaurants Corp., through its subsidiaries, owns and operates restaurants and bars in the United States.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Solid track record and good value.
Simply Wall Street Pty Ltd (ACN 600 056 611), is a Corporate Authorised Representative (Authorised Representative Number: 467183) of Sanlam Private Wealth Pty Ltd (AFSL No. 337927). Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situation or needs. You should not rely on any advice and/or information contained in this website and before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice. Please read our Financial Services Guide before deciding whether to obtain financial services from us.
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